Business rates have been big news recently following the Government’s controversial revaluation which took effect from 1 April 2017. Against the backdrop of all this negativity, the Supreme Court decision of Newbigin (Valuation Officer) v S J & J Monk [2017] at least provided some positive news for those carrying out developments or refurbishments of property.

Rates are payable not only for occupied properties, but also for vacant properties (subject to certain exceptions and reliefs). So when a property owner is struggling to let their property, their financial pressures can be exacerbated by their liability to pay rates on their empty property.

Newbigin considered whether a commercial building undergoing redevelopment had to be valued, for the purposes of business rates, as if it were still a useable office. The principle issue was whether the property should be rated having regard to the physical condition of the property at the valuation date (the reality principle) or in accordance with the statutory assumption that the property was in a state of reasonable repair when valued for rating purposes as set out in para. 2(1)(b) of Schedule 6 to the Local Government Finance Act 1988 (LGFA 1988) as amended (the repairing assumption).

Facts

The first floor (property) of an office building was vacant since 2006, and in 2010 the owners, (Monk) entered into an agreement with a construction company for works to enable it to be used as three separate offices.

On 6 January 2012, the material date for valuation purposes, the property was vacant but undergoing internal refurbishment which included the removal of the air conditioning system (including all internal and external plant), electrical wiring, majority of the ceiling tiles and sanitary fittings and drainage connections.

The property was listed on the 2010 rating list as "offices and premises" with a rateable value of £102,000. Monk argued, before the Valuation Tribunal (VT) that, due to the physical state of the property, the rating list should be altered with effect from 1 April 2010 to "building undergoing reconstruction" and the rateable value should be assessed at £1. The VT disagreed.

On appeal to the Upper Tribunal, Monk's argument was accepted but this decision was overturned by the Court of Appeal (who considered that the works constituted works of repair rather than improvement). That decision flew in the face of established practice and was seen as a disincentive to development. Monk appealed to the Supreme Court.

The decision

The Supreme Court allowed Monk’s appeal. It held that where a property is undergoing redevelopment and incapable of occupation, the assumption of repair did not displace the principle of reality. In this instance, the property was not capable of occupation due to the redevelopment works and the rating list was entitled to be amended to reflect reality. Therefore, the property was to be entered into the local non-domestic rating list at a rateable value of £1 with the description of “building undergoing reconstruction” with effect from 1 April 2010.

Is a property under redevelopment or simply in disrepair?

The matter must be assessed objectively (the subjective intentions of the owner are not relevant). However, in carrying out the objective assessment of the physical state of the property on the material day, the VO can have regard to the programme of works being undertaken. In this instance, the property was, as an objective fact, in the process of redevelopment and no part of the property was capable of beneficial use.

The Court acknowledged that, before the repairing assumption can be applied, the valuer must first consider the “logically prior” question of whether the property is capable of beneficial use. The repairing assumption has no role to play in addressing that question. Similarly, the repairing assumption is relevant only to the physical state of the property; it cannot require property to be valued as though its mode or category of occupation were otherwise than they are in reality.

What was the appropriate assumption?

To assist valuers in reaching decisions, the court considered the correct approach was to:

  • Determine whether a property is capable of rateable occupation at all.
  • Determine the mode or category of occupation
  • Consider whether the property is in a state of reasonable repair for use consistent with that mode or category.

Where works are objectively assessed as amounting to redevelopment, there is no basis for applying the repair assumption to override the reality principle as a building under redevelopment, is not capable of beneficial occupation.

This decision is undoubtedly a victory for developers.

The court dismissed fears that it would create a danger of ratepayers abusing the system by removing facilities from premises and claiming they are incapable of occupation. It considered that the anti-avoidance power under section 66A of the Local Government Finance Act 1988 can be successfully used to prevent such avoidance.

A property owner would be well advised to identify the possible ways in which they can reduce their liability for rates. If it is considering making an application, or are in the process of disputing a valuation for a property undergoing works, specialist advice should be taken.